In Search Of Silicon - author examines what makes for thriving high tech centers like Silicon Valley, California - Brief Article

International Economy, The, May, 2001 by Henry S. Rowen

Many visitors come to Stanford University and elsewhere in Silicon Valley asking, "What makes this place so amazingly dynamic?" and "What do we have to do to make our country/region more like this?"

I don't know what most of these visitors are told. (I tell them to read our book, The Silicon Valley Edge, Stanford University Press, 2000). Perhaps they hear about Stanford as a source of talent and ideas; how Bill Hewlett and David Packard were early and important role models; how the scientist William Shockley brought silicon to the Valley in the 1950's via his company; and how this place became the world center of venture capitalism. All true. But my guess is that they aren't usually reminded of the fact that the Valley is but the largest among many American high tech clusters that include Boston/Route 128, Austin, San Diego, and Northern Virginia.

There are some such clusters elsewhere, including Hsinchu Science City in Taiwan; the Tel-Aviv-Haifa corridor; Cambridge, England, and Bangalore, India. But they are few. So perhaps a better question for the visitors to ask is: "Why are there no major entrepreneurial, high tech centers in large parts of the world, including Japan, France, Italy--or for that matter most of continental Europe?" These countries are certainly not technologically backward but they have lagged in commercializing the enormously important technologies of information, biology, and new materials.

The most successful high tech clusters have evolved ecosystems that specialize in helping firms get started, grow, and go public. They have venture capitalists, lawyers with specialized know-how, headhunters, equipment leasing firms, investment bankers, and much more. Once some entrepreneur gets started, often through some chance event, if the environment is favorable, more firms get going. This, in turn, leads to the strengthening of the local business infrastructure, and so on in a virtuous, upward spiral.

Recently, a venture capitalist who is looking for deals in Japan told me how hard it is to get Japanese engineers to leave their companies for startups. Is this because of some innate Japanese aversion to risk? Perhaps, but contributing to this unwillingness to move is a system in which workers retire at age 55 with a pension based on the last, several high-income years and get the money in the form of a (largely untaxed) lump sum. Faced with that alternative, maybe not many 40-year-old America engineers would move either.

This anecdote fits a common assertion that some "cultures" are more entrepreneurial than others. But are the French, Italians and Japanese fundamentally disadvantaged entrepreneurially in contrast to, say, the Indians and Irish, who have been doing pretty well lately in the software industry? There is a simpler explanation: Many governments, largely inadvertently, have rules that make it hard to launch high tech startups.

Here are some more Japanese examples: As recently as the mid-1990's, a firm could not be listed on the Tokyo Stock Exchange without having many years of profits; corporate pension funds couldn't invest in venture funds; universities couldn't have technology licensing offices; and firms couldn't get the rights to intellectual property they created from government funded research. As a result, there were no true venture capital firms in Japan. Similar obstacles have existed in much of continental Europe; there, too, many are being eliminated. For example, after some political debate, twenty thousand skilled non-EU citizens can now be admitted to Germany.

One wonders how these barriers to entrepreneurship came to be? Many of them reflect a philosophy that government should protect people from making risky investments through regulation, whereas in the United States, the basic philosophy requires risks to be disclosed and lets investors decide.

One of the best non-U.S. success stories is Taiwan, which created Hsinchu Science Park more than twenty years ago. It provided land but, more importantly, it encouraged ethnic Chinese with experience in U.S. high tech firms to come, built bilingual schools, strengthened local universities, and created a research institute from which spun out the leading semiconductor fabrication companies. Most importantly, the government did not do all that much to protect people from losing their money by backing the wrong firms.

Governments of the lagging countries should begin by removing barriers to entrepreneurship, supporting research, and encouraging the formation of favorable habitats. Clones of Silicon Valley still might not emerge, but a lot of money can be made.

Henry S. Rowen is a Senior Fellow at the Hoover Institution and Director of Stanford University's Asia/Pacific Research Center.